As the need for more midstream infrastructure in the Permian Basin becomes all the more apparent—and in some cases critically so—an obvious question relates to whether MLPs are going to return to capital markets as a possible financing tool.
To date, such signs are few, and private-equity capital has largely filled the gap.
However, Ethan Bellamy, senior analyst with Robert W. Baird & Co. covering MLPs, sees green lights flashing not too far ahead.
“I think we have nowhere to go but up from here,” said Bellamy, speaking recently at Hart Energy’s fourth annual Midstream Texas conference in Midland, Texas “I think over the next two years we’ll see the public markets re-open. We’ll probably see some IPOs, maybe of MLPs, maybe of C-corps. I think it’s likely to happen in the next 18-24 months.”
Historically, MLPs have played an important role in financing the midstream sector, Bellamy recalled.
“Retail investors in 2013 and 2014 were financing the MLP market to the tune of about $28 billion per year—and that’s basically zero now,” he said. “Inasmuch as we have a massive Permian midstream opportunity ahead of us, the traditional source of financing for it has completely dried up. The dearth of financing is in exact contrast to the capital needed to fill these gaps.”
The Baird analyst pointed to poor performance by MLPs as the reason why “individual investors have abandoned financings on an overnight basis in the space.” If an investor owned a weighted average portfolio of MLP stocks from 2014 to now, the person would have seen a decline of about 30%, he said. Also, there was a decline in payouts of about 30%, he added.
Bellamy cited moves to “clean up the MLP structure” as factors in rekindling interest in the sector. MLPs needed to ‘purge’ complex structures and “get back to straight financing.” In particular, he referenced a potential restructuring of the Energy Transfer MLP family, expected in late 2018 or the first half of 2019, which would likely involve a cut in the distribution for Energy Transfer Partners LP (ETP) unitholders.
“That [restructuring] should mark a trough in the distribution of MLP payouts,” he predicted.
Bellamy described three midstream players as the “blue-chip haves:” Enterprise Products Partners LP, Magellan Midstream Partners LP and ONEOK Inc. “The rest are probably distributing too much for midcycle multiples,” he said.
In addition, “there are MLPs who still need to cut debt; there’s still too much leverage in the group,” he observed. “The number of MLPs that actually now have the wherewithal to do significant projects without external capital is few and far between.”
Also speaking at the conference was Ken Snyder, chief commercial officer of Frontier Energy Services, who said the surprising rapidity with which the midstream sector “hit the capacity wall” reflected a change from the “battle for barrels” to now a “battle for capacity.” Whereas previously it would cost $4 to move a barrel of crude to the Gulf Coast, “today it might cost you $20,” he said. “All of a sudden we got tight.”
Short- and medium-term projects to alleviate bottlenecks might add 300,000 barrels per day (Mbbl/d) of takeaway, but this will still fall short if Permian production is growing by 70 Mbbl/d per month, said Snyder.
Additions to takeaway estimated by Snyder included expansion of the Sunrise Pipeline, adding 120 Mbbl/d; increasing rail capacity to 100 Mbbl/d; applying drag-reducing agents to boost pipeline capacity by 40 Mbbl/d on the BridgeTex Pipeline; and possibly pushing trucking up to 40 Mbbl/d from 10 Mbbl/d currently. These could potentially bring total takeaway to about 3.5 million barrels per day (MMbbl/d).
However, until another roughly 2.5 MM/d of takeaway is due to come online in late 2019/early 2020, the industry would be in a “tough spot,” according to Snyder.
In the interim, “production will probably have to flatline. But then, in 2020, it will probably ramp up again pretty hard,” he said. As for differentials, “they’ll stay at $20 [per barrel, Midland-to-Cushing). And you’ll probably see a $30 spread from the lease (Midland) all the way to Houston or Corpus Christi.”
Then, “once we overbuild, as we have to in pipeline business,” he continued, “there will be a battle for barrels again. And the differential will probably drop to about $3 again.”
So “buckle up!”
Chris Sheehan can be reached at firstname.lastname@example.org or 303-800-4702.
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